Tuesday 26 th July, 2011 Meeting 22 Econ N171 Economic Development Atanu Dey

Transcription

1 Tuesday 26 th July, 2011 Meeting 22 Econ N171 Economic Development Atanu Dey

2 Economic Growth & Poverty Commission on Growth and Development led by Nobel Laureate Mike Spence poverty cannot be reduced in isolation from economic growth But Economic growth will continue to affect the climate and it is going to change! Econ N171 July 26th 2011 Atanu Dey 2

3 Climate Change is Very Critical Growth and climate change are highly inter-related: How will growth drive the sources of greenhouse gas emissions? How will climate change affect growth, both in the short and long run? How will growth processes involve and affect people in different circumstances? And how could the mitigation of greenhouse gases affect growth? Prof Sir Nicholas Stern Econ N171 July 26th 2011 Atanu Dey 3

4 Cure worse than the disease?... the impact of climate change on the global economy is likely to be quite small over the next 50 years. Severe impacts even by the end of the century are unlikely. The greatest threat that climate change poses to long term economic growth is from potentially excessive near term mitigation efforts. Climate Change and Economic Growth by Robert Mendelsohn Econ N171 July 26th 2011 Atanu Dey 4

5 The Jury is Out on Some Matters...there is widespread agreement among environmental economists that a market-based program to deal with the threat of climate change one that limits carbon emissions by putting a price on them can achieve large results at modest, though not trivial, cost. There is, however, much less agreement on how fast we should move, whether major conservation efforts should start almost immediately or be gradually increased over the course of many decades. Paul Krugman Building a Green Economy NYTimes, 2010 Econ N171 July 26th 2011 Atanu Dey 5

6 Environmental Economics 101 Central insights from economics There are mutual gains from trade Markets discover prices, and buyers and sellers go home happy Markets are efficient Pareto efficient you cannot make someone better off without making someone else worse off Corrections to the market outcome can be done aftermarket Econ N171 July 26th 2011 Atanu Dey 6

7 What about Externalities What if trades impose costs on people who are not part of it? Negative externalities costs imposed on others by economic agents without paying a price cause a market failure Environmental economics answers the basic question: What are we to do about that market failure? Econ N171 July 26th 2011 Atanu Dey 7

8 Ways to deal with Neg Externalities Regulate: rules that prohibit or limit behavior that impose costs on others Environmental laws: emission standards for cars, volume limits on factories, etc These worked to clean up the environment but they have limitations they are inflexible and lack creativity Try Pigou s solution: taxes! Pigou The Economics of Welfare 1920 Econ N171 July 26th 2011 Atanu Dey 8

9 Pigovian Taxes Pigou proposed that people who generate negative externalities should have to pay a fee reflecting the costs they impose on others what has come to be known as a Pigovian tax. The simplest version of a Pigovian tax is an effluent fee: anyone who dumps pollutants into a river, or emits them into the air, must pay a sum proportional to the amount dumped. This is a market-based approach Econ N171 July 26th 2011 Atanu Dey 9

10 Regulation vs Market-based Example: Population control China: regulation One child per couple My solution: A market for the right to produce children Every adult gets ½ a right Two adults can have 1 child For more children, buy the right from sellers of rights Econ N171 July 26th 2011 Atanu Dey 10

11 The License to Pollute Environmentalists were hostile to Pigovian taxes Pollution should be treated like a crime rather than something you have the right to do as long as you pay enough money. In any case, not generally used Variant used: tradable pollution permits aka cap and trade A limited number of licenses to emit a specific pollutant are issued Businesses have to buy additional license to pollute from those who are willing to sell Econ N171 July 26th 2011 Atanu Dey 11

12 Price of Licenses & Pigovian Taxes Licenses provide incentives to cut back on emissions The prices of licenses are equivalent to Pigovian taxes But there are differences Different types of uncertainty Econ N171 July 26th 2011 Atanu Dey 12

13 Uncertainty Pigovian Taxes: the polluters know the price of pollution but the government does not know how much pollution will be generated Cap and Trade: the quantity of pollution is known by the government but the polluters don t know the price Econ N171 July 26th 2011 Atanu Dey 13

14 Distributional Impact Pigovian taxes: government gets revenues, and costs get added to the private sector Cap and trade: Government auction of licenses then it is the same as a tax But if licenses are given to existing players, potential revenues to them and not the government (Rent-seeking) Econ N171 July 26th 2011 Atanu Dey 14

15 Politically Easier to Dole out Licenses The compensate some of the groups that are affected by serious climate-change policies Therefore easier to pass legislation Different approaches Cap and trade used for acid-rain Licenses to pollute distributed free to power companies Econ N171 July 26th 2011 Atanu Dey 15

16 Market-based Controls Work The Clean Air Act of 1990 introduced a cap-and-trade system in which power plants could buy and sell the right to emit sulfur dioxide, leaving it up to individual companies to manage their own business within the new limits... sulfur-dioxide emissions from power plants were cut almost in half, at a much lower cost than even optimists expected; electricity prices fell instead of rising. Acid rain... was significantly mitigated. The results demonstrated that we can deal with environmental problems when we have to. Econ N171 July 26th 2011 Atanu Dey 16

17 Bottom Line The emission of carbon dioxide and other greenhouse gases is a classic negative externality the biggest market failure the world has ever seen, in the words of Nicholas Stern, the author of a report on the subject for the British government. Textbook economics and real-world experience tell us that we should have policies to discourage activities that generate negative externalities and that it is generally best to rely on a market-based approach. Econ N171 July 26th 2011 Atanu Dey 17

18 References: Climate Change and Economic Growth. Robert Mendelsohn The International Bank for Reconstruction and Development / The World Bank What is the Economics of Climate Change? Nicholas Stern. WORLD ECONOMICS April June Building a Green Economy. Paul Krugman. New York Times. April 7, Bjorn Lomborg, Climate Skeptic, Calls for Massive Global Warming Investment. Time.com. August Econ N171 July 26th 2011 Atanu Dey 18